Diversification in the Hedge Fund Industry

43 Pages Posted: 9 Jun 2010 Last revised: 24 Nov 2014

See all articles by Hany A. Shawky

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

Na Dai

SUNY at Albany - School of Business

Douglas J. Cumming

Florida Atlantic University

Date Written: April 1, 2010

Abstract

We provide evidence for a significant relation between diversification and performance in the hedge fund industry. Measuring diversification across four distinct dimensions, we find a significant positive relation between hedge fund performance and diversification across sectors and asset classes. We show that on a risk adjusted basis, hedge funds that diversify across sectors and asset classes outperform other funds by an average of 1.6 percent per year. However, diversification across styles - the “jack of all trades” fund manager - is found to exhibit a significant negative association with hedge fund returns. Diversification across geographies does not have a significant impact on hedge fund performance. For fund of hedge funds, we find a significant positive relation between performance and diversification across sectors, styles and geographies. Furthermore, we find that the motive to engage in diversification is consistent with managerial incentive structure in the hedge fund industry.

Suggested Citation

Shawky, Hany A. and Dai, Na and Cumming, Douglas J., Diversification in the Hedge Fund Industry (April 1, 2010). Journal of Corporate Finance, Vol. 18, 2012. Available at SSRN: https://ssrn.com/abstract=1622361 or http://dx.doi.org/10.2139/ssrn.1622361

Hany A. Shawky (Contact Author)

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

Na Dai

SUNY at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

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